Stablecoin Adoption in Nigeria: Opportunites, Challenges and future Outlook

Abstract

Stablecoins, pegged to the value of a fiat currency, offer a hedge against inflation and volatility, making them an attractive option for individuals and businesses. Nigeria, with its thriving fintech ecosystem and relatively large population, presents a promising market for stablecoin adoption.
In this article, we explore the current state of stablecoin adoption in Nigeria, key use cases, and opportunities. There’s so much going on in the Nigeria crypto space and this article provides a comprehensive overview of the stablecoin landscape in Nigeria, highlighting the opportunities, challenges, and future outlook for this Innovative technology.

The Rise of Stablecoins: A New Era in Cryptocurrency Adoption.

Stablecoins are a type of cryptocurrency designed to mitigate the volatility of traditional cryptocurrencies like Bitcoin and Ethereum. They are pegged to the value of a fiat currency, such as the US dollar, and are backed by a reserve of assets equal to the amount of stablecoins in circulation. This ensures that the value of stablecoins remains stable, hence the name.

The concept of stablecoins is not new as it has been around since 2014, but it wasn’t until 2018- 2019 that it started gaining traction. Today, stablecoins are becoming increasingly popular, with over 200 stablecoin projects currently out there.

Types Of Stablecoins

There are several types of stablecoins, each having its own unique characteristics and advantages. Here are some of the most common types of stablecoins:

1. Fiat-Collateralized Stablecoins: These stablecoins are backed by a fiat currency, such as the US dollar, and are pegged to its value. Examples include USDT (Tether) and USDC (USD Coin).
2. Commodity-Backed Stablecoins: These stablecoins are backed by a commodity, such as gold or oil, and are pegged to its value. Examples include PAX Gold (PAXG) and Tether Gold (XAUT).
3. Crypto-Collateralized Stablecoins: These stablecoins are backed by other cryptocurrencies and are pegged to their value. Examples include DAI (Dai) and Maker (MKR).
4. Algorithmic Stablecoins: These stablecoins use complex algorithms to maintain their stability, without the need for collateral. Examples include Terra (LUNA) and Kowala (kUSD).
5. Hybrid Stablecoins: These stablecoins combine different collateral types, such as fiat and crypto, to maintain their stability. Examples include StableUSD (USDS) and Gemini Dollar (GUSD).
6. Central Bank-issued Stablecoins (CBDCs): These stablecoins are digital currencies issued by central banks and are pegged to the value of their respective fiat currencies. Examples include the China’s Digital Currency Electronic Payment (DCEP) and the European Central Bank’s Digital Euro.

Each type of stablecoin has its own advantages and disadvantages, and the choice of which one to use depends on the needs and preferences of individuals and institutions

Why are stablecoins gaining Popularity?

Stablecoins combine the properties of fiat currencies with the added utility of running on a blockchain, which makes them programmable and easily integrated with other digital assets. Here are some of the factors that makes stablecoins stand out:

1. Stability: This is the most obvious advantage of stablecoins. They offer the benefits of cryptocurrency, such as fast and cheap transactions, without the risk of extreme volatility and price fluctuations.
2. Adoption: Stablecoins are becoming more widely accepted in many countries as a form of payment, with many merchants and businesses starting to accept them
3. Regulatory compliance: Stablecoins are more likely to be compliant with regulatory requirements, unlike other cryptocurrencies making them a more attractive option for institutions and individuals alike.
4. Remittances: Stablecoins are ideal for cross-border transactions, as they eliminate the need for currency conversion and offer faster and cheaper transactions.
5. Decentralized finance (DeFi): Stablecoins are a crucial component of DeFi, enabling the creation of decentralized lending platforms, stablecoin based exchanges, and other DeFi applications.

Stablecoins adoption in Nigeria : A promising future for financial inclusion

Nigeria has experienced significant growth, becoming the sixth most populous nation worldwide and the most populous in Africa. With a robust economy valued at $440 billion, Nigeria boasts the largest economy on the continent. In 2019, the country was among the fastest-growing economies globally. Over the past generation, Nigeria’s economic landscape has undergone substantial transformation, with its service, financial, and technology sectors expanding rapidly.

In recent years, Nigeria has experienced a growing interest in cryptocurrency and blockchain technology. The country has become one of the largest markets for cryptocurrency in Africa.

Chainalysis

The growth of cryptocurrency in Nigeria has been driven by a number of factors, including a lack of trust in the traditional financial system, a desire for financial inclusion, and the need for alternative investment opportunities.

According to a recent report by Chainalysis, Nigeria is experiencing a significant surge in stablecoin adoption, driven primarily by individuals seeking to hedge against inflation.

Cryptocurrency activity summary in Sub-Saharan Africa- chainalysis

The report reveals that Nigeria received a substantial $56 billion in cryptocurrency transactions between July 2022 and June 2023, the highest volume in Africa. This figure surpasses that of South Africa with over 2x, which received $22 billion in cryptocurrency transactions during the same period. This solidifies Nigeria’s position as a leader in cryptocurrency adoption on the continent.

The current State of stablecoins in Nigeria

The eNaira Logo

The proposal of a Naira-based stablecoin in Nigeria is not just a step towards digitalization or blockchain adoption but a strategic decision that addresses several core economic challenges. In Nigeria’s diverse economy where traditional banking reaches only a fraction of the population and where remittances play a crucial role, a stablecoin pegged to the Naira presents a transformative opportunity.

eNaira— Nigeria’s CBDC

The Central Bank of Nigeria (CBN) launched the eNaira, Africa’s first central bank digital currency (CBDC), on October 25, 2021. While the actual preparation process for the eNaira began in 2017 with internal studies, external consultations, and a proof of concept in a sandbox environment. The eNaira is a liability of the CBN, utilizing blockchain technology and stored in digital wallets for payment transactions.

The eNaira is built on Hyperledger Fabric, a cutting-edge distributed ledger technology that enables a decentralized network of nodes to maintain a comprehensive and immutable record of all CBDC transactions. This blockchain-based system allows nodes to take turns leading the creation of blocks. This process ensures a secure, transparent, and consensus-driven approach to tracking and verifying eNaira transactions.

The eNaira can be owned and used by both wholesale (banks) and retail (merchants and individuals) clients through electronic wallets, similar to physical cash.

In summary, the eNaira is a significant step in Nigeria's digital currency journey, offering a secure and efficient alternative to physical cash. Its launch marks a milestone in the country's financial inclusion efforts, aiming to integrate millions of unbanked Nigerians into the banking sector.

The Current state of eNaira — A success or failure?

The eNaira, Nigeria’s central bank digital currency (CBDC), faces a uncertain future this even as stablecoin adoption gains momentum. Despite efforts to improve it, the eNaira has struggled to gain traction among Nigerians or even make a significant impact in the digital payments space. With a new governor at the Central Bank of Nigeria (CBN) and a president known for his radical approach, the prospects for the eNaira look increasingly uncertain, and its demise is a possibility.

Nigeria’s eNaira, One

Year After - IMF

The dashboard above shows the performance of eNaira one year after its launch and it can be noticed that the retail wallet downloads experienced an initial surge, reaching 500,000 in just 25 days. However, the growth slowed significantly, taking 63 days to reach 600,000 and 143 days to reach 700,000.

It’s also important that most eNaira wallets remain inactive, with only a brief period of activity. Weekly transactions average 14,000, just 1.5% of existing wallets, leaving 98.5% unused. The weekly transaction value is 923 million naira.

While the success of eNaira might be a big stepping stone for Nigeria in his adoption of blockchain technology and stablecoins, eNaira was not a success.

Stablecoin adoption in Nigeria — Identifying The Challenges

Stablecoins adoption in Nigeria faces challenges such as regulatory uncertainty, limited awareness, infrastructure gaps, and security concerns, which hinder trust and understanding among potential users. It is important to address these challenges and promote stablecoins' potential for financial inclusion. Here are some of the challenges.

1. Regulatory uncertainty

The lack of clear guidelines and regulations from the Central Bank of Nigeria (CBN) and other relevant authorities creates uncertainty and ambiguity, making it difficult for businesses and individuals to navigate the legal landscape. This uncertainty hinders innovation, investment, and adoption.

2. Limited awareness

Many Nigerians are still unfamiliar with stablecoins and their benefits, such as financial inclusion, faster transactions, and lower fees. Raising awareness through education and marketing campaigns can help increase adoption.

3. Lack of trust

Some Nigerians may be hesitant to adopt stablecoins due to trust issues, such as concerns about the issuer's credibility or the stability of the coin. Building trust through transparency, security, and reliable operations is vital.

4. Security concerns

The risk of fraud, hacking, and other security breaches can undermine trust in stablecoins. Implementing robust security measures, such as multi-factor authentication and encryption, is essential.

5. Technical complexity

The complexity of blockchain technology and wallets can intimidate potential users. Developing user-friendly interfaces and simplifying the onboarding process can help address this challenge.

6. Limited merchant acceptance

The adoption of stablecoins requires merchants to accept them as a form of payment, which can be a challenge if merchants are not convinced of their benefits.

7. Political and economic instability
Nigeria’s political and economic instability can affect the stability of stablecoins and the willingness of individuals and businesses to adopt them.

Addressing the Challenges and Promoting Adoption

Addressing the challenges facing stablecoins adoption in Nigeria is crucial for harnessing their potential to promote financial inclusion, reduce transaction costs, and increase economic efficiency. By overcoming these challenges, Nigeria can unlock the benefits of stablecoins, including improved financial stability, increased access to credit, and enhanced economic growth, ultimately leading to a more robust and inclusive financial system. Here are some of the ways we can overcome these challenges:

1. Regulatory clarity: Clear guidelines and regulations from the Central Bank of Nigeria (CBN) and other relevant authorities can help build trust and confidence.
2. Awareness and education: Public awareness campaigns, workshops, and training programs can educate individuals and businesses about stablecoins' benefits and uses.
3. Infrastructure development: Investing in digital payment infrastructure, internet connectivity, and payment terminals can enhance accessibility and usability.
4. Security measures: Implementing robust security protocols, such as multi-factor authentication and encryption, can mitigate fraud and hacking risks.
5. Interoperability: Encouraging collaboration and standardization among stablecoin issuers can promote seamless interactions and transactions.
6. Financial literacy: Educational initiatives can improve understanding of stablecoins and their role in financial inclusion
7. Incentives and rewards: Offering incentives and rewards for adopting stablecoins can encourage individuals and businesses to try them.
8. Partnerships and collaborations: Strategic partnerships between fintech companies, banks, and other stakeholders can promote stablecoins' adoption and integration.

Conclusion

In conclusion, stablecoin adoption in Nigeria has the potential to revolutionize the country’s financial landscape by promoting financial inclusion, reducing transaction costs, and increasing economic efficiency. While there are challenges to be addressed, the benefits of stablecoins make them an attractive solution for individuals, businesses, and the government.

By promoting awareness, developing infrastructure, and fostering partnerships, Nigeria can overcome the hurdles and unlock the full potential of stablecoins. As the ecosystem continues to evolve, stablecoins can play a vital role in shaping Nigeria’s digital financial future. With the right support and regulation, stablecoins can help create a more inclusive, efficient, and stable financial system for all Nigerians.

References

• https://www.imf.org/en/Publications/WP/Issues/2023/05/16/Nigerias-eNaira-One-Year-After-533487
• The state of crypto in Nigeria — https://coinmarketcap.com/alexandria/article/the-state-of-crypto-in-nigeria
• https://go.chainalysis.com/rs/503-FAP-074/images/The%202023%20Geography%20of%20Cryptocurrency%20Report.pdf?version=0
• https://medium.com/@adesinaadele/nigerias-bold-move-with-the-naira-stablecoin-94c294af4042
• https://www.cbn.gov.ng/currency/enaira.asp